Mowi ASA

Okay, thank you very much. Hello everyone, thank you for joining the Mowi presentation of Q2 ’19 results.

Let me first by – start by apologizing for the delay, the start here. We were scheduled to begin 10 minutes ago, and we had some challenges in doing so, I apologize for any inconvenience.

So let’s get on with it. Q2 was a very good quarter for our company.

In fact, it was the best second quarter for Mowi. I’m referring now to our presentation material which I hope you all have access to.

It can be found on our webpage under the Investor Relations section. I am beginning here with the highlights on page three.

I’ll quickly run through these highlights as many of the points that I’m about to make will be addressed in a bit more detail as we progress through this presentation. We did have record high Q2 operational EBIT of €211 million, this was largely driven on 26% higher volume year-over-year which was expected and largely consistent with our prior volume guidance.

We enjoyed the high achieved prices on strong demand, this is an ongoing condition which we’ve had now for the better part of the last three years. Our cost per kilo harvested improved relative to the comparative quarter 2018 and seasonally record high sales and production volumes in feed.

I would also add that we have new production now beginning at our Kyleakin facility in Scotland and we’ll talk more about that a bit later in the presentation. We also announced that we will plan to rebuild the Kritsen smokehouse in France, which unfortunately burnt in prior quarters and we will then expand the launch of our Mowi brand also into the French market following success that we’ve had to date in Poland.

We’ve entered into an agreement to acquire farming assets, licenses primarily in Region Mid of Norway. That transaction is expected to close this month of August and that will provide us with some additional capacity obviously and also better control over an important region in which we farm from both a buyer security and production planning perspective.

The board resolved yesterday to a quarterly dividend of NOK2.6 per share which will be paid in this current quarter 3, 2019. Moving along to page four of the presentation, here are the key financials.

Again with some further details to follow later in the presentation, I think within this table I would point out a couple of things. At the very top line, you'll see that we had revenue growth of approximately 15% eclipsing €1 billion in revenue, which is record high levels, particularly in Q2.

Moving down, we had a 21% growth in our Op EBIT as I mentioned in the highlights primarily driven by volume, although we did have stable to improving costs in Q2, in many regions, but that was offset of course by lower prices, market prices for our products. EBIT, Financial EBIT is which is the third line, €194 million, we’ll look at some of the reconciliation items between our operational EBIT and our financial EBIT, but there is a couple of noteworthy points, one is a one-off connected to restructuring costs, associated with the situation, with the Kristen [ph] plant and also we had a very minimal effect in this quarter with regard to our fair value adjustment for our biomass, and we'll look at some of those items in further detail.

As mentioned before, we had a 26% growth in our harvest volume at just over 98,000 metric tons. I think, we had guided at 98,000.

So I think we're quite spot on in that regard. And then I think, I would point out our operational EBIT on a per kilo basis, blended average at 2.14 which is really very good.

It is down from the comparative quarter Q2, 2018 really driven by the mix in country level performance and the relative contribution of those regions, and we'll get into all of those regions in forthcoming slides. Moving along, please to page five.

Here we have a chart, which illustrates really the spot price development. These are the reference prices in many of our major markets, and you know what, generally we have seen falling prices in Q2, which we view as partly a seasonal effect, but I would say exacerbated by certain conditions at sea, that have driven some early harvest.

Some smaller fish as a result, which brings down the average price. And also we've seen some good growth, which has brought us up against some MAB levels as an industry where we've needed to do some harvesting to be compliant with regard to our obligations to our regulators.

I think this chart really speaks for itself, and we'll get into pricing a little bit later. Certainly, I would point out two more things, one keep in mind, that when we talk about pricing, and the fact that prices have come down relative to Q2, 2018 please keep in mind that Q2, ‘18 and ‘17 for that matter were record high Q2 prices, and so we're comparing against a high base.

Moving on please to page six, this is -- this slide illustrates our blended price achievement, for Mowi, taking into account contracts, spot price and quality, relative to the reference prices that we just spoke about in the prior slide. Taken in totality, our global price achievement was 101% of reference price.

I think this sheet is relatively self-explanatory. I guess, I would just point out a couple of things.

In the case of Canada, we have no contracts for Canadian salmon, that's not new. That's generally how we go to market with those products.

We've had very good quality of salmon in Scotland, also not entirely new, but certainly beneficial for our price achievement which was as you can see 108% in the quarter. I think generally contracts had a positive effect on our price achievement in all markets, in which we enter into those types of arrangements.

Moving along, please to the next slide, this is an operational EBIT waterfall, really bridging our Q2 ‘19 results with our Q2 ‘18 results. And I would say that generally the beneficial result in feed farming in markets was largely driven by increased volume.

I think, it's noteworthy in the case of feed and we'll get into this in a little bit more detail later that we did have some period cost, some startup cost associated with the new plant in Scotland that was about €4.5 million which was a drag on our operational EBIT. Adjusted for that one-off, we would have had about a €7 million EBIT in that aspect of our business, which I think is about an 8% EBIT margin.

Consumer products, we've had an ongoing condition, which we describe as really fierce competition. That's not necessarily the case in all markets, but certainly it's in the case in many major markets in Central Europe, particularly in France and in Poland, which is creating a lot of price pressure, and a drag on our earnings for this aspect of our business in total.

This was the case in the prior quarter, case in the current quarter, and we're providing some guidance that we expect this to continue into the current quarter. We'll get into that a little bit more in detail as we get to that division of our business.

So moving along to our farming regions, I'm on slide eight please. Looking at Norway, which is really a compilation of an aggregation of three different regions in which we farm, and we'll look at those regions in a little bit more detail in the slides to come.

But suffice it to say, it was a very good quarter. Our Op EBIT was very similar to our comparable quarter Q2, 2018 at about €126 million.

This was on slightly lower costs, certainly, higher volumes a couple of thousand additional metric ton but both of these beneficial results were in fact offset by lower prices. We had about 100% price achievement in Norway, but prices were down about 10%.

The reference prices I should say were down about 10% relative to the comparative quarter. So it was a good overall result in stable costs year-over-year.

The Region South, we were harvesting from favorable sites. Region Mid was impacted by harvesting of smaller fish really driven by biological challenges.

Region North, stable with a good performance. I will get into all of these regions in more detail in just a couple of slides.

If you look at the waterfall analysis on this slide you'll see what I had referred to as you know really stable cost. I think, it's noteworthy that our biological costs have actually decreased on a blended average basis of about 3%.

The non-seawater cost that is reflecting negatively in this waterfall probably should be embellished by pointing out that we had a one-off a positive effect in Q2 of 2018, and then we had some incremental incident based mortality in Q2, 2019, which is really driving what appears to be the increase in cost. The incident based mortality was in Region Mid and we'll talk more about that shortly.

Sea lice levels are beginning to increase. It's the time of the year where conditions catalyze the development of sea lice.

We're watching this very closely of course, and we are seeing some things increasing in that regard. Certainly, Q3 will be an important quarter with regard to this primary challenge in our industry.

Q3 2019 is expected to be impacted by lower harvest rates and higher cost and reduced price achievement. A lot of this has to do with what I was just alluding to you know known challenges, such as [Indiscernible] fish which we’ll be harvesting and have harvested in Q3, bringing down the average weight and therefore also the prices that we might achieve in the marketplace.

And just based on our production plan, we expect to be harvesting from some poor performing sites. Moving on, please page nine.

This is a snapshot of our sales contract portfolio for salmon of Norwegian origin. There's really nothing unusual here, and I'll only point out that we have a good, stable price agreements and expect slightly more contracted volume in Q4 2019 as compared to Q4 2018.

Q4 is, I'm sure many of you know, is a period of heightened demand for our products. Moving on, as I mentioned, here is a graph depicting the operational EBIT per kilo by region for Norway.

And as you can see, we've had varied results although we consider them to be quite good. Region South had notable improvement as a result of our harvest plan, and harvesting from good performing sites.

We had good biology overall, and lower costs, Region Mid. However, we had a decline in financial performance, due to biological challenges.

PD sea lice treatments, which resulted in some early harvest in smaller fish as I mentioned a moment ago. And we also had some incident base mortality of approximately €3 million which was reported in this quarter.

Overall it was about a 15% cost increase in this particular region. Region North, a region with very good performance.

Generally stable cost in biology and we think quite comparable overall to the prior Q2 2018, but for effects of market prices. Moving along to Scotland please, slide 11.

Scotland was our best performing site on a per kilo of salmon harvested. You can see that our operational EBIT grew from €21 million to €46 million, really on the back of volume growth and much like other areas in which we're farming, but pretty significant percentage increase from about 9 million metric tons to nearly 16 million metric tons.

So we've had good growth, and reduced cost driven in part certainly by scale and by volume. But just generally good biology and harvesting from good sites.

We had positive as we saw in the achieved price table in prior slide. We had positive contribution from our contract sales notwithstanding the fact that the spot price was down.

However, that was offset some by the lower contribution from consumer products in the quarter. Here we are suggesting that we expect costs to increase in Q3 2019, has a lot to do with production planning and where we're harvesting, and in this case, sites with higher cost.

So far the sea life situation in Scotland has been stable, but again, Q3 is a very important period of time with regard to sea life’s development. Moving along to Canada.

This is both a combination of our operations in Region West and also now Region East. You can see that we had an operational EBIT increase from €7.8 million to €10.4 million, again driven in large part by volume.

We had good volume growth in contribution by Northern harvest, which is the company we acquired just about one year ago, which contributed about 3000 metric ton of the 4.5 thousand metric ton increase you see from quarter to quarter prices decline to due to general market condition and increased volumes of smaller fish. And in fact prices, and we'll see this in a later slide but prices for Canadian salmon depending on product form and location declined 13% to 15% in market currency.

With that said, I probably should point out that prices have started to recover and August 19 is starting to look a lot like August 18 in terms of pricing, and in fact, Canadian prices are up about one U.S. dollar per kilo.

Couple of points of distinction between the two areas were farming in Canada. The Canada East struggled a bit with environmental conditions connected to cold sea water temperatures.

We also had a loss of Smoltz on land as well in the period, resulting in €1.7 million or so in the write off. West struggled recently with algae, which resulted in the smaller fish that I mentioned to go.

I should probably point out that many of the large fish that are produced in Canada are shipped to Asia, and we were unable to supply those large fish in the way that we have in the past. And so we think there's some market implication for us in that regard.

Moving along please to Chile. Chile had another good quarter, again, higher earnings driven by the volume increase.

In fact, it was very significant increase in volumes not dissimilar from Scotland, we moved up from about 10,000 metric ton to 15,000 metric ton of harvest. There was like most markets reduce spot prices on increased supply.

Generally, the supply out of Chile industry supply out of Chile increased by about 6% and we saw a spot market prices reference prices declined by about 10%. Although we don't have a significant amount of product under contract, you can reference back to our achieved price slide.

The product that we did have under contract contributed positively to our price achievement. Unfortunately, we're seeing higher sea life levels in Chile and not dissimilar from Scotland and Norway.

We're starting to see some resistance to the conventional additional treatments that have been applied, in that region and so we're moving to take Norwegian technology and our learnings connected to sea lice’s mitigation in that region to Chile. And this, it will be a development that we will of course treat with very high priority.

With regard to cost guidance, we're expecting cost to increase somewhat in Q3, 2019 versus the current quarter we're reporting due to lice treatments and harvesting from poorer performing sites. Moving on page 14 Ireland and the Faroes, although relatively small regions, these are very significant and unique contributions to our business.

Ireland is a great organic producing region, and Faroes uniquely sells to Eastern Europe and to Russia. We had good results from Mowi Ireland as the organic salmon market remains strong.

It does in order to produce these types of organic products, it does have the highest cost profile of all of our salmon produced but it also has the highest price as well. In the current quarter we're reporting, we had higher volume from 1.2 million metric ton up to 2 million metric ton on somewhat higher prices.

Like other regions, we're expecting costs to increase somewhat in Q3 2019, relative to the current quarter. Mowi Faroes really delivered satisfactory results, made about 100% increase in volume, but very small volume.

700, 800,000 tons to 1.4 and quite limited in production. We only have three sites in the Faroes and in this particular quarter, we had an EBIT decrease as a result of higher costs in some early harvest as a result of challenges at Sea.

But I think the other thing I would point out to you is our superior share which is our highest quality grade is declined from 94% in Q2, 2018 to 80% that’s really disappointing and connected to some treatment effects and scale loss and things of that nature. Moving along please to slide 15, the consumer products division.

This is our value-added business. I think most of you are probably quite familiar with it.

And as I mentioned in my earlier comments, you know we are seeing some challenges and some aspect of this from a market perspective. We did enjoy seasonally all-time high volumes.

We sold 47,000 tons versus 41,000 tons in Q2, 2018. Much of this volume increase was driven by fresh products.

We had about a 19% increase in fresh products sold. Strong demand and increased consumption really in all regions, we had very good factory performance in many parts of our business in both North America and also in Europe, but really it's more Central Europe where we're seeing fierce competition really on price.

Our costs are generally stable, operating efficiencies are okay. It's really the price that we're feeling the pressure.

And competition in the Chilled European segment, we think will continue to negatively affect our earnings into Q3. I think just as a general statement I would say that, if you look at this on the surface and you see in operational a bit of less than 1%.

I'd say two things. One, if you adjusted that for bulk trading which some of which is actually included in this, it's actually a more like 1.4%.

But nonetheless it may seem a bit underwhelming, but it is this aspect of our value chain that is really driving market development and growing demand in our view for the long-term. Moving along to feed, slide 16; our feed division is growing.

It's growing both in terms of results in the quarter and expansion of this aspect of our business. We had seasonally record high sales and production from our plant in Norway.

We produced over 104,000 metric tonnes in Q2, 2019 compared to Q2, 2018, and connected to that we sold 86,000 tonne in this current quarter compared to Q2, 2018. This was a strong contributor to the good earnings from feed in Norway.

Increase feed prices also contributed to these earnings. Although raw material costs -- some raw material costs were slightly higher which offset some of the beneficial increase in the feed prices; it was a very good quarter for feed having a lot to do with good growth and good conditions in Norway.

Important to know that our new plant in Scotland is under commissioning and now up and running and we're pleased by this result. We did have -- I think I mentioned earlier about €4.5 million in period cost, which is a drag on our EBIT margin in the quarter, which would've been on the order of €7 million and about 8% had we -- had those costs.

The good news is, the plant is in Scotland is producing feed has a lot of flexibility to produce a variety of different feeds and is a very significant step forward in our self-sufficiency strategy around our primary input. I think a real important takeaway for you and certainly for us is that base as the development of this facility and where we are today we're quite confident that our capacity which we had targeted at about 170,000 tonne is now notably more than that at about 240,000 tonne, it's really quite an exciting development for us.

In the quarter, we were 94% self-sufficient on our feed demand in Norway, which I think is fairly consistent with prior quarters. Okay.

Well, let's move on then to financial markets in harvest volumes. Lot of this we've already discussed, but perhaps I can add a little bit more color to some of these points.

I'm on the slide 18, which is a statement of profit and loss. And as stated, our view is this was a very good quarter.

I mentioned the reconciliation of our operational EBIT to financial EBITDA. I think there's two things that I would particularly point out and they are in the right hand margin, which is we had a one-off restructuring provision of €19 million connected to the Kritsen's Smokehouse in France.

These are industrial and social costs incurred in the period. And then income from associated companies, although not new, we'd like to point out the earnings that we generate connected to our investment in Nova Sea in this particular quarter, €10 million.

Just a couple of metrics; underlying earnings per share €0.29 and return on capital employed of €21.6, again driven by large part harvest volume increase of about 26%. Moving on to the balance sheet, slide 19 please, which you'll probably see immediately is about a €1 billion increase in our balance sheet.

This is connected to our organic and acquisitive growth and some accounting I suppose, more specifically IFRS 16 which requires a capitalization of leases and its not included in our Q2 2018 is about €346 million of the €1 billion increase. We also have increased biomass in the sea, which you can find in our footnotes which is a reflective of about 100 million in additional inventory.

New CapEx -- excuse me, net CapEx over the last 12 months and purchases of new licenses in Norway which we did last year at about €50 million. And then the acquisition of Northern harvest which I referenced earlier in the call, about €215 million.

This is also not included in the Q2, 2018. I think that closed in July in 2018.

Moving along cash flow and net interest bearing debt; couple of points; so we started the period, the quarter at about €1 billion in net interest bearing debt and ended at about €1.1, so not a lot of change in that regard, but certainly a lot of activity in the middle. We had about €248 million in operational EBITDA.

This was offset by some working capital buildup connected to more biomass at sea, connected to supporting that growth and the feed production that we spoke about earlier in the feed inventory as well. Just below that line, taxes paid €81 million, also noteworthy; this largely addresses our tax obligations for the year and is higher than perhaps predicted by some connected to higher earning.

CapEx, at about €69 million was in line with expectations both in terms of our guidance and our own internal budgeting. And then I think the other noteworthy point that I would share with you is the dividend of €137 million paid in this particular quarter declared in Q1.

With regard to cash flow guidance on slide 21, really no change here other than taxes as I just mentioned. So we're very consistent with what were reported in Q1 and I won't spend a lot of time going through this.

We did – as I said, we did increase taxes paid in totality by about €20 million, but all of our investing is in keeping with our strategic initiatives and our budget as previously described. Moving along to financing; here again only one change; we increased our German loan by 20 – excuse me, €30 million and this was a very cheap money, and gives us some additional borrowing capacity.

Otherwise no changes long-term, net interest bearing debt target is unchanged. Moving along to supply development please, page 23.

In the quarter we had about an 8.3% industry supply growth. This growth was in the upper bounds of our guidance.

We had suggested in the prior quarter 3% to 7% growth in Norway. We had slightly more harvest than we would have predicted connected to good growth and strong feed sales, but also on the downside connected to algal bloom and some other biological challenges which push forward some early harvest and therefore additional volumes in Q2 that might have been in the subsequent quarter.

In the case of Chile, the harvest is generally in line with guidance. Average weights have been reduced in 2019 due to the higher sea lice levels and increased resistance to medicinal treatments.

Anytime we treat for sea lice particular with the mechanical treatments we have lost growth and that's potentially what's it play here. Moving along to slide 24, development in reference prices, I think we've talked about this a fair bit.

This quantifies some of the change in price from the comparable quarter Q2. And as you can see both in market currency and in euro we've seen declines in prices, again partly to do with seasonality, partly to do with smaller fish, shifting the price, average price and partly to do with higher volumes and other factors of course.

It's hard to make sweeping generalizations about a global marketplace for our product. But as I mentioned before we are seeing some price improvement, and August so far is quite similar to prior year.

I think the other thing that's kind of interesting about this which is quite obvious all I'm sure is that you can see quite clearly in this graph now that we have a full three years more or less reflected that, we really had a demonstrable shift upward since 2015, which is no suggestion of the future. It's just an obvious point that we as a company and as an industry have enjoyed higher prices since that period of time.

Moving along to the next slide, global volume by market. Consumption increased by 6% on growth and really most all markets.

I think the markets that I would point out on sort of negative side is Russia. The way we view this based on our market analysis is really a shift in terms of where we're directing product coming out of Chile, Brazil.

As you will see has increased by 14.5%, Russia decreased by 11.5% and we certainly know that we're moving a lot more product into Brazil at the expense of the Russian market. I think the other thing I would point on the negative is sort of a China, Hong Kong situation.

We're both disappointed and little bit surprised by the sideways movement, essentially no growth, which I should probably point out there was some growth in the Chinese market which was dragged down and diluted by negative growth in Hong Kong. In the case of China though we had about 5% growth which we still think is disappointing, and again has to do with the kind of a hangover effect of trade restrictions particularly around sanitary restrictions connected to where we can harvest fish for the Chinese marketplace.

On the upside, we see very good growth in Europe which is the most significant market for our product, had about the nearly 8% growth. And then the U.S.

at about 3% growth is very good. Asia other than China and Hong Kong, Japan little bit underwhelming but it's a very mature market and this type of growth or decline, this range of growth and decline is pretty common I would say.

And other than that all-in-all a very positive market development I think for our product. Industry guidance, moving on please to the next slide; we had guided global growth of about 4% to 7% for 2019.

I think industry consensus is about 6%. And in the next two quarters we're guiding for 3% to 7% growth accordingly.

We thought we would share with the Kontali guidance for 2020 at about 4%, which really I think is further indication of structural condition our industry is in and has been in with regard to growth potential. We'll see and continue to revise that as we get new visibility into the future growth.

With regard to our own organization and our own production on slide 27, there's no change here. We're still guiding for 430,000 metric of production and the next quarter will be an important one in terms of our growth.

So moving along, I guess in part summary really, our outlook is that the sector fundamentals remain strong. Fish Pool forward pricing as I last looked at, it was $5.9 per kilo.

We're identifying, capitalizing upon organic growth opportunities really across the value chain. And then, we're hoping to complete this acquisition which we think is really important as I previously stated; I think that's just a matter of days away from concluding that.

And then the feed plant; I think we have already spoken about. But this has a long-term implication on our business which we think is tremendous, and then to repeat the quarterly dividend for Q3, 2019 at NOK2.6.

So that's the quick run through of the Q2, 2019. And I think I would open it up for any questions that anyone may have at this time and also please know that I will be on road show in the U.S.

and Canada next week. And my colleagues are on road show this week in Europe.

And of course we're all available by phone and email if you have any specific questions you'd like to address. So again thank you all very much for your time on this call.

And please let me know if there is any question.

Okay. Well, again, thank you very much.

And should you have any questions following this call or your further digestion of the information you've received today or…

Yes.

Sure.

Hi, Kim, thank you for taking my question. Just to understand this.

So how do you see and which kind of impact could have the recent news we read about the situation in Alaska. I don't know if you have an idea of potential impact on the market?

Yes. Well, this is Glenn Flanders.

Kim is colleague of mine and was unable to take the call today, but I'd be pleased to try to answer your question. But before doing so, what specifically are you referring to with regard to the news in Alaska?

Are you referring to the possible U.S. federal regulations associated with offshore farming or is there something else that you're thinking about?

No. At this point.

Yes. Well, I really don't have a lot to say about it actually, because it is only notional at this point.

There is some proposed legislation that's grinding its way through the U.S. bureaucracy with the outcome uncertain.

But in the current drafting of this legislation as I understand that it would mandate that all states including Alaska provide some various mechanisms for offshore farming, that's farming outside of 3 miles of the coastline of any given state. Certainly, Alaska has the potential in places to farm Atlantic salmon, but there is quite a bit of political and NGO resistance to the idea.

And so what the implication is for our industry, I think is really to be determined and I think we are probably some months if not years away from understanding whether there is an actionable opportunity or not. And I think the last thing I would say about it is of course, we need the proper technology and protocol for offshore farming in any region whether Norway, Alaska or anywhere else and those types of technologies are not well-established from a commercial point of view at this time.

Thank you. And sorry, just follow-up about the other situations about the hot temperatures of water that is killing a large number of salmon.

I was wondering if this could have an impact in terms of supplies, so demand is on price in general.

Do you mean the warm water temperatures; which is a naturally occurring event in this time of the year and some of the environmental implications associated with it or is there something specific area or something more specific that you're thinking about?

Both in reality, because I was wondering if this situation that we are seeing in Alaska could be something that could happen also in other regions, because it's linked to a change in the planet situation, and also if considering the fact that this hot temperature is killing a large number of salmon in Alaska, if this could have an implication on the average price of this year because...?

Okay. Yes.

I misunderstood your question initially. Yes, yes.

So, its – well, first of all, one the climate change, certainly something that we monitor very closely in connection with our ESG strategy and of course we're evaluating our environment in all aspects as it applies to the biology of salmon intensively. In the case of what's going on from a water temperature perspective in Alaska?

I don't know frankly. All of the details associated with that in terms of the effects on the wild capture fishery, I think a lot of that is unfolding now.

We're really in the middle of the wild salmon capture period or season. And so I'm really am not well suited to respond to that.

There probably is some influence between on price and market development when the wild capture salmon season is underway. But generally they are quite different products at least in my mind.

Our aquaculture platform can provide a consistent product 24 hours a day, seven days a week on a year-round basis and of course wild capture is connected to five different species of specific salmon not all consumed in the same way that the farmed Atlantic is, take Sushi for example. And so, certainly there's some overlapping effects, but I don't they're dramatic and I really don't have enough information about what's going on with the wild capture quota and volume to really give you any insight as to what it might mean for our market.

Thank you very much.

Thank you.

Okay, great. Well, once again, thank so much for your attendance.

Please stay in touch with me and my colleagues as you continue your review of our industry and our company. And thanks again and wish you all a great day.